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Republicans’ St Augustine-like Fiscal Virtue-signalling

The Washington Post reports that “House Republicans are considering a vote on a ‘balanced-budget amendment’” (BBA) to the constitution, having just backed a $1.3 trillion omnibus spending bill which will worsen the deficit considerably.

With deficits now projected to rise as high as 5.3 percent of GDP by 2019, this move amounts to the worst kind of “fiscal virtue signaling” on behalf of the GOP leadership. The vote appears designed to tell voters that the GOP favors fiscal restraint, safe in the knowledge the amendment is near-certain to fail, given the hurdles in the Senate alone and despite all recent evidence to the contrary.

There will therefore be a lot of rightful mocking and dismissiveness from the commentariat on this move. But two points from the conclusions on my recent paper on fiscal rules should be borne in mind.

First, lots of people will use this hook to come out and say a BBA is bad economics, particularly given that overwhelmingly mainstream economists oppose a requirement at the federal level for the books to balance every year.

But countries around the world have developed much more sophisticated fiscal rules which in effect balance budgets over the economic cycle. Switzerland’s is even part of its constitution, and it appears to work pretty well. Fiscal rules really can really help to shape responsible budget outcomes, provided they smooth spending by capping it around trend revenues (rather than requiring balance every year), and avoid scope for overoptimistic assumptions or creative accounting by politicians.

Second and crucially, though, fiscal discipline – even to get to the stage of introducing and abiding by rules – requires political and public buy-in. At the moment, the equilibrium in Washington is instead for higher spending and more borrowing, and a continual reluctance to countenance reform of entitlement programs which drive the dreadful long-term debt projections.

Republicans had the opportunity, after the tax cuts, to explain to voters that if they liked their tax cuts, and wanted to keep their tax cuts, then fiscal restraint over a number of years was necessary. Now, even getting to a stage where a BBA could kick in would likely take years given the high deficit, and the political difficulties of cutting spending.

No doubt there are some Republicans who still care and worry about balancing the books. But with this proposed vote, the GOP instead is preaching like St Augustine: “Lord give me fiscal discipline, but not yet.” The best way of locking in fiscal responsibility is to practice it.

Read my full paper on fiscal rules and the experience of other countries here.